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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives

1. Describe the common classes of receivables.

2. Describe the accounting for uncollectible receivables.
3. Describe the direct write-off method of accounting
for uncollectible receivables.
4. Describe the allowance method of accounting for
uncollectible receivables.
5. Compare the direct write-off and allowance methods
of accounting for uncollectible accounts.
Learning Objectives

6. Describe the accounting for notes receivable.

7. Describe the reporting of receivables on the balance
sheet.
8. Describe and illustrate the use of accounts
receivable turnover and number of days’ sales in
receivables to evaluate a company’s efficiency in
collecting its receivables.
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Classification of Receivables

o Accounts receivable are normally expected to be

collected within a relatively short period, such as 30
or 60 days.
Classification of Receivables

o Notes receivable are amounts that customers owe for

which a formal, written instrument of credit has been
issued.
Classification of Receivables

o Other receivables expected to be collected within one

year are classified as current assets. If collection is
expected beyond one year, these receivables are
classified as noncurrent assets and reported under the
caption Investments. Examples of other receivables
include:
 Interest receivable
 Taxes receivable
 Receivables from officers or employees
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f or un
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncollectible Receivables

o Companies often sell their receivables to other

companies. This is called factoring the receivables,
and the buyer of the receivables is called a factor.
Uncollectible Receivables

o Regardless of how careful a company is in granting

credit, some credit sales will be uncollectible. The
operating expense recorded from uncollectible
receivables is called bad debt expense, uncollectible
accounts expense, or doubtful accounts expense.
Uncollectible Receivables

o Some indications that an account may be

uncollectible include the following:
 The receivable is past due.
 The customer does not respond to the company’s attempts
to collect.
 The customer files for bankruptcy.
 The customer closes its business.
 The company cannot locate the customer.
Uncollectible Receivables

o The direct write-off method of accounting for

uncollectible receivables records bad debt expense
only when an account is determined to be worthless.
The allowance method records bad debt expense by
estimating uncollectible accounts at the end of the
accounting period.
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Write-Off Method

o On May 10, a $4,200 account receivable from D. L.

Ross has been determined to be uncollectible.
Direct Write-Off Method

o The account written off on May 10 is later collected

on November 21.

Reinstatement
entry

Receipt of
cash entry
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
The Allowance Method

o On December 31, ExTone Company estimates that a

total of $30,000 of the $200,000 balance of their
accounts receivable will eventually be uncollectible.

The specific customer accounts

cannot be decreased, so a contra
account, Allowance for Doubtful
Accounts, is credited.
The Allowance Method

o The net amount that is expected to be collected,

$170,000 ($200,000 – $30,000), is called the net
realizable value (NRV) of the receivables. The
adjusting entry reduces receivables to the NRV and
matches uncollectible expenses with revenues.
The Allowance Method

o On January 21, John Parker’s account of $6,000 is

written off because it is uncollectible.

Note that the allowance

account credited earlier is
debited at the write-off, not
Bad Debt Expense.
THE ALLOWANCE
METHOD
The Allowance Method

o During 2014, ExTone Company writes off $26,750 of

uncollectible accounts, including the $6,000 account
of John Parker. After posting all entries to write off
uncollectible amounts, Allowance for Doubtful
Accounts will have a credit balance of $3,250
($30,000 – $26,750).
The Allowance Method

o If ExTone Company had written off $32,100 in

accounts receivable during 2014, Allowance for
Doubtful Accounts would have a debit balance of
$2,100.
 The Allowance Method

o Nancy Smith’s account of $5,000, which was written

off on April 2, is later collected on June 10. Two
entries are needed: one to reinstate Nancy Smith’s
account and a second to record receipt of the cash.

Reinstatement
entry

Receipt of
cash entry
Estimating Uncollectibles

o The allowance method requires an estimate of

uncollectible accounts at the end of the period. Two
methods are used to estimate the amount debited to
Bad Debt Expense.
 Percent of sales method
 Analysis of receivables method
Percent of Sales Method

o If ExTone Company’s credit sales for the period are

$3,000,000 and it is estimated that 3/4% will be
uncollectible, Bad Debt Expense is debited for
$22,500 ($3,000,000 x .0075). This approach
disregards the balance of $3,250 in the allowance
account before the adjustment.
Percent of Sales Method

o After the following adjusting entry on December 31

is posted, Allowance for Doubtful Accounts will have
a balance of $25,750 ($3,250 + $22,500).
 PERCENT OF
SALES METHOD
Analysis of Receivables Method

o The longer an account receivable is outstanding, the

less likely it is that it will be collected. Basing the
estimate of uncollectible accounts on how long
specific amounts have been outstanding is called
aging the receivables.
Analysis of Receivables Method

o The analysis of receivables method is applied as

follows:
 Step 1: The due date of each account receivable is
determined.
 Step 2: The number of days each account is
past due is determined.
 Step 3: Each account is placed in an aged class
according to its days past due.
 Step 4: The totals for each aged class are
determined.
Analysis of Receivables Method

 Step 5: The total for each aged class is multiplied by an

estimated percentage of uncollectible accounts for that
class.
 Step 6: The estimated total of uncollectible accounts is
determined as the sum of the uncollectible accounts for
each aged class.
Analysis of Receivables Method

o The preceding steps are summarized in an aging

schedule, and this overall process is called aging the
receivables.
ANALYSIS OF
RECEIVABLES
METHOD
Analysis of Receivables Method

o The estimate based on the age of receivables is

compared to the balance in the allowance account to
determine the amount of the adjusting entry.
Analysis of Receivables Method

o ExTone Company has an unadjusted credit balance of

$3,250 in Allowance for Doubtful Accounts. In
Exhibit 1, the estimated uncollectible accounts
totaled $26,490. The amount to be added to the
allowance account is $23,240 ($26,490 – $3,250).
The adjusting entry is as follows:
Analysis of Receivables Method
o After the preceding adjusting entry is posted to the
ledger, ExTone Company’s Allowance for Doubtful
Accounts will have an adjusted balance of $26,490.
This is the amount that was determined by aging the
accounts.

Same amount as the estimated amount

determined by the aging process.
Analysis of Receivables Method

o If ExTone Company’s unadjusted balance of the

allowance account had been a debit balance of
$2,100, the amount of the adjustment would have
been $28,590 ($26,490 + $2,100).
COMPARING
ESTIMATION
METHODS
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Comparing Methods

o The primary differences between the direct write-off

and allowance methods are summarized below.
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Characteristics of Notes Receivable

o A note receivable, or promissory note, is a written

document containing a promise to pay.
Characteristics of a promissory note are as follows:
 The maker is the party making the promise to pay.
 The payee is the party to whom the note is payable.
 The face amount is the amount the note is written for
on its face.

(continued)
Characteristics of Notes Receivable

 The issuance date is the date a note is issued.

 The due date or maturity date is the date the note is to be
paid.
 The term of a note is the amount of time between the
issuance and due dates.
 The interest rate is the rate of interest that must be paid on
the face amount for the term of the note.
 NOTES
RECEIVABLE
Notes Receivable

o The maturity value is the amount that must be paid at

the due date of the note, which is the sum of the face
amount and the interest.
Due Date of a 90-day Note

o What is the due date of a 90-day note dated March 16?

 Days in March 31
 Minus issuance date of note 16
 Days remaining in March 15
 Add days in April 30
 Add days in May 31 90
days
 Add days in June
(due date of June 14) 14
 Term of note 90 days
Alternate Approach

o Total days in note 90 days

 Number of days in March 31
 Issue date of note, March 16 (16)
 Remaining days in March
days 15

 Number of days in April 30

 Number of days in May
days 31
 Residual days in Answer:
June June 14 (14) days
DUE DATE OF A
90-DAY NOTE
Accounting for Notes Receivable

o Received a $6,000, 12%, 30-day note dated

November 21, 2014, in settlement of the account of
W. A. Bunn Company.
Accounting for Notes Receivable

o On December 21, when the note matures, the firm

receives $6,060 from W. A. Bunn Company ($6,000
face amount plus $60 interest).
Accounting for Notes Receivable

o If W. A. Bunn Company fails to pay the note on the

due date, it is considered a dishonored note
receivable. The note and interest are transferred back
to the customer’s account receivable.
Accounting for Notes Receivable

o A 90-day, 12% note dated December 1, 2014, is

received from Crawford Company to settle its
account, which has a balance of $4,000.
Accounting for Notes Receivable

o Assuming that the accounting period ends on

December 31, an adjusting entry is required to record
the accrued interest of $40 ($4,000 x 0.12 x 30/360).
Accounting for Notes Receivable

o On March 1, 2015, $4,120 is received for the note

($4,000) and interest ($120).
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 REPORTING
RECEIVABLES ON
THE BALANCE
SHEET
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Accounts Receivable Turnover

o The accounts receivable turnover measures how

frequently during the year the accounts receivable are
being converted to cash.

Accounts
Net Sales
Receivable =
Turnover Average Accounts
Receivable
ACCOUNTS RECEIVABLE TURNOVER
Number of Days Sales in Receivables

o The number of days’ sales in receivables is an

estimate of the length of time the accounts receivable
have been outstanding.

Number of Days’ Average Accounts Receivable

Sales in =
Average Daily Sales
Receivables
 NUMBER OF DAYS SALES IN
RECEIVABLES
 a bl e s
R e c eiv d
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.